Does Your HQ Operation Fit With Corporate Strategy?

Is a lean headquarters operation the key to success? How should headquarters design fit with corporate strategy? New research from professor David J. Collis has surprising answers.

by Martha Lagace

The specter of "headquarters" usually looms large in the business world's imagination, but few managers—and few CEOs, especially new CEOs—understand how size, structure, and performance of headquarters interact. To investigate, Harvard Business School senior lecturer David J. Collis joined forces with colleagues David Young and Michael Goold on a wide-reaching project. With five goals in mind, which Collis explains below in an e-mail interview with HBS Working Knowledge, they surveyed 600 corporations in seven countries, and published the results in a working paper, "The Size, Structure and Performance of Corporate Headquarters." Among their findings: Contrary to popular belief, European HQs were smaller than American HQs. And the much-touted "lean and mean" ideal does not necessarily lead to better financial performance.

Martha Lagace: What was it about headquarters that drove you to study them further?

David J. Collis: Little academic research has been done on the topic even though it is clearly of interest to CEOs and often is a focus of their activities, particularly early in their tenure. As a result, reductions in corporate headquarters are often very visible decisions.

Q: You, your co-authors, and other research partners undertook a survey of 600 corporations in seven countries. Why have corporate headquarters been so under-researched? What particular assumptions were you trying to examine?

A: It is hard to get the data on headquarter sizes because companies are not required to report that level of detail. As a result, a survey is the only way to collect the data.

Corporate headquarters need to be carefully designed to fit with the strategy.

We were really trying to do five things: a) document the size and structure of headquarters, b) determine if there were any significant differences in headquarter size between countries, c) determine if there was any relationship between the size of corporate headquarters and the financial performance of the company, d) try to understand the factors that determined the size of headquarters, and e) try to produce benchmarks for companies to use in evaluating the size of their own headquarters.

Q: You wrote in the paper, "The most striking aspect of the survey results is the wide variation in the size and composition of corporate headquarters." Why is such variation possible? What does it mean?

A: There is huge variation in headquarter size basically because there is a huge variation in the underlying strategy that corporations pursue. Essentially we found that "structure follows strategy," so that the size and roles of the corporate headquarters vary with the underlying corporate strategy. A conglomerate will have a very different corporate headquarters than a firm that has diversified into a very tightly related set of businesses.

The real takeaway is that "one size does not fit all," but that corporate headquarters need to be carefully designed to fit with the strategy.

Q: What were some of the other most intriguing results from the survey? Did any of these results surprise you?

A: Perhaps the most surprising result was that the U.S. does not have smaller headquarters than European firms—indeed the opposite is true. The expectation was that U.S. headquarters were leaner than European ones because of the capital market pressures on U.S. firms. Instead, European firms' headquarters are smaller. As expected, Japanese firms had very large headquarters.

The second surprising finding was that there is no evidence that small corporate headquarters produce superior financial performance. We had expected that smaller, "lean and mean" headquarters would lead to better performance. In fact, the opposite is true—larger headquarters are associated with higher profitability. This does not mean that it is good to increase the size of a company's headquarters—it could be that profitable companies waste their money on large headquarters—but it does suggest that companies should not necessarily be looking to minimize the size of their headquarters.

Q: The lean and mean approach doesn't seem to hold water. Do you think faith in lean and mean headquarters will be difficult for managers to let go of?

A: Lean and mean will be hard to let go of, and to some extent that is appropriate. We found that there are three roles for headquarters to play: public company functions; shared services; and value adding functions.

The public company functions—tax reporting, treasury, audit, etc., that every company has to do—should be done as effectively, i.e., as lean and mean as possible. Indeed, we found it is possible to run a large 20,000-person firm with very few (perhaps twenty-seven) people in headquarters. Shared services, such as pension administration or IT, that are made available to the business units should also be subject to a market test, even if they can be quite large.

It is really only the value adding functions—corporate R&D (if the firm has such a function), business development, some HR functions, etc. —that probably should not be squeezed as tightly as possible because they do seem to be able to truly add value.

Q: Any suggestions for what our business readers should ask themselves when they look around their own headquarters?

A: Readers should look first at the corporate strategy their company pursues and ask whether the corporate headquarters size and roles fits with that strategy. They should then try and understand what goes on at headquarters in the three areas listed above. Only then can one assess whether or not the headquarters is too large, too small, doing the wrong things, the right things. If they wanted to, they could then benchmark themselves against other firms of similar sizes and industries in a very pragmatic way.

Q: How are you going to take these learnings further? What's next for you?

A: We need to finish the academic papers from this research! The real challenge going forward is that our research was primarily descriptive, using the survey data. We could not, for example, explain why European headquarters were smaller than U.S. companies headquarters—we could only document the differences. Similarly, from our data we could not resolve the question of whether larger headquarters increase profitability, or whether in fact it is more profitable firms that increase the size of headquarters. Resolving those questions is next on the agenda.